The Fuse Live from Vienna: Rollover in OPEC’s Production Quota Confirmed

A Tesla Model S passes in front of OPEC headquarters in Vienna, minutes before the group’s bi-annual ministerial began. At both the two-day OPEC International Seminar that has preceded today’s meeting, and today, there has been no discussion of concerns about the potential for long-term decreases in global oil demand.

Today, in the Vienna headquarters of the Organization of the Petroleum Exporting Countries (OPEC), oil ministers from member countries and media from around the globe have gathered in an effort to glean a sense of what’s to come for the global oil market over the next six months.

By now, it’s well documented that Saudi Arabia, the group’s de-facto leader and the only effective swing producer from the past decade, is not interested in ceding market share—not only to U.S. shale oil companies, but also to other OPEC member states. Before the last meeting in November, an official cut in OPEC production was expected by many, and the Oil Kingdom’s decision to refrain from trimming output rocked markets and sent oil prices into a downward spiral.

A lot can change in six months. In fact, earlier this week, rumors were circulating that OPEC would in fact increase its official quota. The reasons for such a move were not clear, except perhaps to re-emphasize the market signal that the cartel’s new motto can be summarized as, “Drill, Baby, Drill.”

Of course, as was best emphasized by ConocoPhillips CEO Ryan Lance yesterday during the second day of the 6th OPEC International Summit, shale oil is “here to stay.” In his view, companies have grown leaner, more efficient, and reduced costs by as much as 30 percent.

Nevertheless, the rumors of a quota increase have proven false. Even as the cartel’s collective crude oil production levels have risen to 30.81 million barrels per day based on last month’s Short Term Energy Outlook, OPEC is keeping the official quota unchanged. Why not adjust the official quota to reflect the current reality? According to Bob McNally, Founder and President of Rapidan Group, OPEC requires a universal consensus to make any official decision. Without universal agreement, no decision is made.

Members express their intention to increase output

Before the official OPEC meeting, press and analysts are allowed inside the meeting room for direct interaction with ministers of member states. Some ministers are more forthcoming than others—states like Nigeria and Venezuela, who are coincidentally some of the worst-hit by the current price environment—are notably taciturn. Oil ministers of Kuwait, Angola, and the United Arab Emirates expressed satisfaction with the current output quota.

Iraq’s oil minister Adil Abd al-Mahdi doubled down on bullishness about the country’s output capacity, saying their production will climb to 6 mbd by 2020. Yesterday, he downplayed the country’s disruption risk in spite of the ongoing conflict with Islamic State, telling the audience that Iraq is, in fact, a safe country and a good place to invest.

Iran’s oil minister Bijan Namdar Zangeneh reiterated the nation’s intentions to return to pre-sanctions production levels within six months after sanctions are lifted.

Unanswered Questions

Theoretically, if the ambitions of Iran and Iraq come to fruition, we could be looking at an OPEC production approaching 35 million barrels per day within the next 2-3 years. Even without continued increases in non-OPEC oil supply, this would far exceed anticipated increases in global oil demand over the next few years, with untold consequences for prices. Will OPEC take steps to mitigate this increase? Not according to Saudi Oil Minister Ali al-Naimi, who stated during the press conference, “Oil production policy is a sovereign right,” and “everyone is entitled to produce what they want.”

However, there are underreported risks associated with unconstrained growth in oil output from both OPEC and non-OPEC producers. Specifically, if production continues to outstrip demand and prices plunge, investment in future oil projects will drop-off. In the medium-term, if ecnomic growth is healthy and global oil demand continues to increase, the oil market could quickly find itself in the opposite situation, in which demand greatly outstrips supply. In the words of Cornelia Meyer, an independent oil analyst, this could “send prices skyrocketing.”

The likelihood of this scenario is unknown. It’s one of many unanswered questions from this meeting. Among them:

What, if anything, has emerged from the side conversations between Saudi Arabia and Russia?

What is OPEC’s purpose if each individual member state continues to increase production without restraint in the near term—will the group continue to maintaining an official production quota?

Will OPEC allow oil importer Indonesia to rejoin its ranks as a full member?

If U.S. shale producers continue to show resilience in the face of low oil prices, will we see production drop off from higher cost resources, such as ultra-deepwater projects and Canadian oil sands?

If the global supply glut grows in the next six months and prices fall, what will it mean for unstable oil producing countries who depend on oil revenues to sustain their national budgets and economies—can we expect more geopolitical turmoil as a result?

Bonus Video: To hear some comments directly from the oil ministers of Iraq and Iran, watch our footage from the frantic press scramble for comments from OPEC representatives immediately before the ministerial.

Major oil producing countries, & wealthy individuals in certain petrostates, have injected billions of dollars into international soccer, and their reach is spreading in an attempt to promote their “soft power.”

Despite the backlash from Bitcoin’s collapse in value, a group led by a former CFTC commissioner is set to launch an oil-backed cryptocurrency called OilCoin. Here's why its investors will run into a number of risks.

Midstream bottlenecks in Canada and output declines in Latin American producers are reshaping the heavy crude market in the Western Hemisphere. Who are the winners and losers from the changes in fundamentals?

Oil prices are rising and US production is growing sharply, but the shale sector is still not turning a profit. Companies have had to raise about $500 billion in bond sales since 2010 and they have spent $280 billion more than they have generated in the past decade.

If more large upstream projects are not sanctioned in the next 12-24 months, oil prices will likely again approach $100 per barrel. Underinvestment and continued geopolitical risk suggest that oil markets are heading into another 'decade of disorder.'

Stay Informed

Subscribe to our newsletter today!

The Fuse is an energy news and analysis site supported by Securing America’s Future Energy. The views expressed here are those of individual contributors and do not necessarily represent the views of the organization.

Issues in Focus

Safety Standards for Crude-By-Rail Shipments

A series of accidents in North America in recent years have raised concerns regarding rail shipments of crude oil. Fatal accidents in Lynchburg, Virginia, Lac-Megantic, Quebec, Fayette County, West Virginia, and (most recently) Culbertson, Montana have prompted public outcry and regulatory scrutiny.

2014 saw an all-time record of 144 oil train incidents in the U.S.—up from just one in 2009—causing a total of more than $7 million in damage.

The spate of crude-by-rail accidents has emerged from the confluence of three factors. First is the massive increase in oil movements by rail, which has increased more than three-fold since 2010. Second is the inadequate safety features of DOT-111 cars, particularly those constructed prior to 2011, which account for roughly 70 percent of tank cars on U.S. railroads. Third is the high volatility of oil produced from the Bakken and other shale formations, which makes this crude more prone towards combustion.

Of these three, rail car safety standards is the factor over which regulators can exert the most control. After months of regulatory review, on May 1, 2015, the White House and the Department of Transportation unveiled the new safety standards. The announcement also coincided with new tank car standards in Canada—a critical move, since many crude by rail shipments cross the U.S.-Canadian border. In the words DOT, the new rule:

Since the rule was announced, Republicans in Congress sought to roll back the provision calling for an advanced breaking system, following concerns from the rail industry that such an upgrade would be unnecessary and could cost billions of dollars. The advanced braking systems are required to be in place by 2021.

Democrats in Congress have argued that the new rules are insufficient to mitigate the danger. Senator Maria Cantwell (D-WA) and Senator Tammy Baldwin (D-WI) both issued statements arguing that the rules were insufficient and the timelines for safety improvements were too long.

The current industry standard car, the CPC-1232, came into usage in October 2011. These cars have half inch thick shells (marginally thicker than the DOT-111 7/16 inch shells) and advanced valves that are more resilient in the event of an accident. However, these newer cars were involved in the derailments and explosions in Virginia and West Virginia within the past year, raising questions about the validity of replacing only the DOT-111s manufactured before 2011.

Before the rule was finalized, early reports indicated that the rule submitted to the White House by the Department of Transportation has proposed a two-stage phase-out of the current fleet of railcars, focusing first on the pre-2011 cars, then the current standard CPC-1232 cars. In the final rule, DOT mandated a more aggressive timeline for retrofitting the CPC-1232 cars, imposing a deadline of April 1, 2020 for non-jacketed cars.

Oops!

We weren't able to sign you up for our newsletter.Please check your email address and try again.

DataSpotlight

The recent oil production boom in the United States, while astounding, has created a misleading narrative that the United States is no longer dependent on oil imports. Reports of surging domestic production, calls for relaxation of the crude oil export ban, labels of “Saudi America,” and the recent collapse in oil prices have created a perception that the United States has more oil than it knows what to do with.

This view is misguided. While some forecasts project that the United States could become a self-sufficient oil producer within the next decade, this remains a distant prospect. According to the April 2015 Short Term Energy Outlook, total U.S. crude oil production averaged an estimated 9.3 million barrels per day in March, while total oil demand in the country is over 19 million barrels per day.

This graphic helps illustrate the regional variations in crude oil supply and demand. North America, Europe, and Asia all run significant production deficits, with the Middle East, Africa, Latin America, and Former Soviet Union are global engines of crude oil supply.